Students, Not Shoppers Will Fill Kmart Space

As the number of empty big-box retail stores continues to grow across the nation due to consolidation or bankruptcy, some alternative uses for that surplus space reflect the ultimate in creativity. Case in point: two former Kmart stores in Lee County, Fla., are being turned into schools.

The Lee County school board signed a contract in December 2003 to buy two buildings where Kmart had once been a tenant. The sites were just two of hundreds that were shuttered over the last two years after the retailer filed for Chapter 11 bankruptcy. Located in Lehigh Acres and Estero, Fla., the buildings will be purchased from a consortium of individuals for $5.7 million and $4 million, respectively.

Finding a suitable use for vacant big-box retail space is an ongoing challenge in the shopping center industry as the number of big-box retailers continues to shrink, say real estate experts. In some cases, retail is no longer the highest and best use of the property.

“The number of big-box deals has slowed tremendously,” says Michael Finkel, managing director of Koniver Stern Group in Miami Beach. “There are not a lot of new store concepts today of sufficient size to fill spaces formerly occupied by Kmart, and most retailers who compete with Kmart already have their spaces.”

The Kmart sites were chosen because of the difficulty of finding suitable property in that area on which to build, says Bill Moore, executive director in charge of school site acquisition and school construction for the Lee County school district. “The only land we could find were wetlands,” he says. The cost of filling in wetlands would make the dirt as expensive as the school itself, Moore adds.

In addition, the Kmart sites offered the bonus of already-installed air-conditioning, plumbing and other necessities, Moore says. At 114,000 and 119,000 sq. ft., the size of the buildings fit the district's needs as well — the prototype for elementary schools in Lee County is 114,000 sq. ft.

For landlords, when an anchor goes dark, adaptive reuse may not be as lucrative as having a retail tenant in place and could call into question the financial viability of the shopping center. But sometimes it is the only answer, especially as Wal-Mart, Target and other discounters continue to cut into the business of big-box retailers. Plus, Wal-Mart owns most of its stores, and the company won't use vacant Kmart space because the Wal-Mart footprint requires 110,000 sq. ft. to 220,000 sq. ft. Kmart footprints usually range from 80,000 to 125,000 sq. ft., says Finkel.

Reconfiguring the space for smaller retailers can be costly, says Michael Wiener, president and CEO of Excess Space Disposition Inc. in Lake Success, N.Y., and Huntington Beach, Calif. “It could run from $200,000 to a $1 million to subdivide a retail space for small retailers,” he says. “And then there's broker commissions and downtime,” says Wiener. The entire process could take six months to a year.

There also are other costs when an anchor leaves, even if the shopping center continues to function as a retail center. There are co-tenancy clauses, says Finkel, which can give smaller tenants the right to leave without penalty if an anchor vacates. Most, however, will stay for up to a year to see what happens, he says.

“With that anchor space empty, the value of the center could be adversely affected,” he explains. “The cap rate is based on income, so it may go up (when the anchor leaves), which means there may be a smaller pool of investors.”